Microsoft is likely to win the next round of the game console fight against Sony, based on a potentially huge cost difference, investment firm Merrill Lynch said on Wednesday.

Potentially huge cost difference

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Microsoft is likely to win the next round of the game console fight against Sony, based on a potentially huge cost difference, investment firm Merrill Lynch said on Wednesday.

In an analysis, the firm said an Xbox 360 could be selling for half the price of a PlayStation 3 (PS3) around the end of next year.

Based on a breakdown of the parts being used inside the two game machines, Merrill Lynch said: "The PS3 will not only be significantly more costly than the Xbox 360 at launch, but will continue to operate at a cost disadvantage for several years."

The investment banker said Sony's PS3 is an impressive machine, but the costly components inside could raise the price of a PS3 to $500 (about £281) when it launches in the spring of 2006. By then, the Xbox 360 could be selling for $249 (£140), Merrill Lynch estimated.

Sony Computer Entertainment could not be reached for comment as a result of a public holiday in Japan.

Microsoft has announced two versions of the Xbox 360: a basic version for $300 (£168) and a premium edition for $400 (£225).

The lower cost could put as many as 10 million Xbox 360 machines into users' hands by the end of 2006, Merrill Lynch said.

"As volumes ramp up, Microsoft should see an improved ability to lower hardware costs," the investment firm said. This would make the Xbox 360 an even better deal for users. It would also encourage game developers to put their latest titles out more quickly, to capture the huge audience.

The biggest cost issue for the PS3 is the Cell processor. Although Sony hopes the new microprocessor architecture could find its way into many new products beyond just the PS3, thereby lowering its per chip cost, Merrill Lynch believes the Cell won't gain much ground in other markets.

"Processor architectures have been in consolidation mode for the past five years, and we think it's going to be difficult for Sony to find takers for Cell outside of the PS3," the banking firm said.

One recent example of such consolidation was Apple's June decision to move its Macintosh computers to Intel processors by the end of 2007. The computer maker has been using PowerPC chips developed by IBM and Freescale Semiconductor for the past decade.

Heavy research costs and expensive manufacturing could cause the Cell to cost about $160 (£90) per chip initially, Merrill Lynch said, compared with the $100 (£56) for the PowerPC chips used in the Xbox 360.

The Blu-ray drive planned for the PS3 will also add a $75 (£42) cost disadvantage, compared with the DVD-ROM drive Microsoft plans to install in the Xbox 360.

Merrill Lynch also highlighted Sony's weaker financial situation compared with the strong position at Microsoft.

"All of this might not matter were Sony in a position to take large losses on the PS3, but the company's financial situation raises questions about just how much money Sony is going to be willing to lose," it said.

Meanwhile, Microsoft has a cheaper game console and a probable six-month lead over the PS3 in getting to market. Microsoft plans to launch the Xbox 360 on 22 November in the US, followed by Europe on 2 December and Japan on 10 December.